Cronos Group Reports 2019 Fourth Quarter and Full-Year Results

Published: March 31, 2020

Cronos Group Inc. announced its 2019 fourth quarter and full-year business results.

The Audit Committee of the Cronos Group Board of Directors has completed its review of certain bulk resin purchases and sales of products through the wholesale channel. Following completion of the review, and on the recommendation of the Audit Committee and advice from the Company’s independent auditor, KPMG LLP, the Board determined that Cronos Group will restate its unaudited interim financial statements for the first, second and third quarters of 2019. Accordingly, the Company reduced revenue for the three months ended March 31, 2019 by C$2.5 million and the three months ended September 30, 2019 by C$5.1 million.

“We are pleased that the Audit Committee has completed its review, and that Cronos Group is now current with the filing of our financial reports. As we move forward, we are committed to improving our internal controls and financial reporting practices, maintaining the highest standards of transparency and accountability, and enhancing our capabilities and resources across functions to support our strategy,” said Mike Gorenstein, CEO of Cronos Group.

“Cronos Group ended 2019 with a strong foundation and balance sheet, and a clear focus on achieving our core strategic initiatives to drive long-term, sustainable growth. Importantly, we expanded our Canadian distribution footprint, broadened our brand portfolio, enhanced our global supply chain capabilities and advanced our breakthrough intellectual property and research and development initiatives. While the world currently faces an unprecedented time of uncertainty related to COVID-19, we believe we are well-positioned to build on these accomplishments as we maintain our investments in brands and products that will resonate with adult consumers and generate sustainable, long-term value for shareholders.”

Financial Results

(in thousands of USD)

Three months December 31,

Change

Year ended December 31,

Change

2019

2018

$

%

2019

2018

$

%

Net revenue

United States

$

2,693

$

—

$

2,693

N/A

$

3,364

$

—

$

3,364

N/A

Rest of World

4,615

4,285

330

8

%

20,386

12,121

8,265

68

%

Consolidated net revenue

7,308

4,285

3,023

71

%

23,750

12,121

11,629

96

%

Gross profit (loss)

(20,375

)

1,880

(22,255

)

(1184

)%

(17,864

)

6,213

(24,077

)

(388

)%

Gross margin

(279

)%

44

%

—

(323)pp

(75

)%

51

%

—

(126)pp

Reported operating loss

$

(63,869

)

$

(8,871

)

$

(54,998

)

620

%

$

(121,484

)

$

(21,341

)

$

(100,143

)

469

%

Adjusted operating loss (i)

(56,601

)

(8,871

)

(47,730

)

538

%

(114,216

)

(21,341

)

(92,875

)

435

%

Other Data

Cash and cash equivalents

1,199,693

23,927

1,175,766

4914

%

Short-term investments

306,347

—

306,347

N/A

Capital expenditures

757

32,676

(31,919

)

(98

)%

38,953

88,586

(49,633

)

(56

)%

(i) See “Non-GAAP Measures” for more information, including a reconciliation of adjusted operating loss(ii) Dollar amounts are as of the last day of the period indicated

Fourth Quarter 2019

Net revenue of $7.3 million in Q4 2019 increased by $3.0 million from Q4 2018, primarily driven by an increase in the volume of products sold in the Rest of World segment and the Redwood acquisition, partially offset by a decrease in the price of products sold in the Rest of World segment.

Gross profit (loss) of ($20.4) million in Q4 2019 decreased by $22.3 million from Q4 2018, primarily driven by the inventory write-down of $24.0 million.

The Company incurred an inventory write-down of $24.0 million, made up of a one-time charge of $1.9 million, related to the repurposing of certain facilities at the Peace Naturals Campus, and a $22.1 million write-down on cannabis plants, based on the estimated market value of the specific strains previously in production, and cannabis oil, primarily driven by downward pressure in market prices during the year. If we were to adjust for the effects of the inventory write-down, gross profit in Q4 2019, would have been $3.6 million, representing a gross margin of 50%. We anticipate inventory write-downs in the short-term due to pricing pressures in the marketplace and while the Company executes its operational repurposing of the Peace Naturals Campus.

Reported operating loss of ($63.9) million in Q4 2019 increased by $55.0 million from Q4 2018, primarily driven by the inventory write-down in Q4 2019, one-time charges related to the repurposing of certain facilities at the Peace Naturals Campus, an increase in general and administrative expenses in order to support Cronos Group’s growth strategy, an increase in sales and marketing in order to create, build and develop brands and an increase in R&D costs.

Adjusted operating loss of ($56.6) million in Q4 2019 increased by $47.8 million from Q4 2018, primarily driven by inventory write-downs in Q4 2019 and an increase in general and administrative expenses in order to support Cronos Group’s growth strategy, an increase in sales and marketing in order to create, build and develop brands and an increase in R&D costs.

Full-Year 2019

Net revenue of $23.8 million in Full-Year 2019 increased by $11.6 million from Full-Year 2018, primarily driven by an increase in the volume of sales in the Rest of World Segment due to increases in production, increases in the volume of wholesale sales and the launch of the adult-use market in Canada.

Gross profit (loss) of ($17.9) million in Full-Year 2019 decreased by $24.1 million from Full-Year 2018, primarily driven by the inventory write-down of $29.4 million.

The Company incurred an inventory write-down of $29.4 million, made up of a one-time charge of $1.9 million, related to the repurposing of certain facilities at the Peace Naturals Campus, and a $27.5 million write-down on cannabis plants, based on the estimated market value of the specific strains previously in production, and cannabis oil, primarily driven by downward pressure in market prices during the year. If we were to adjust for the effects of the inventory write-downs, gross profit in Full-Year 2019, would have been $11.6 million, representing a gross margin of 49%.

Reported operating loss of ($121.5) million in Full-Year 2019 increased by $100.1 million from Full-Year 2018, primarily driven by inventory write-downs in Full-Year 2019, an increase in general and administrative expenses in order to support Cronos Group’s growth strategy, an increase in sales and marketing in order to create, build and develop brands and an increase in R&D costs related to the Company’s two research partnerships and one-time charges related to the repurposing of certain facilities at the Peace Naturals Campus.

Adjusted operating loss of ($114.2) million in Full-Year 2019 increased by $92.9 million from Full-Year 2018, primarily driven by inventory write-downs in Full-Year 2019, an increase in general and administrative expenses in order to support Cronos Group’s growth strategy, an increase in sales and marketing in order to create, build and develop brands and an increase in R&D costs related to the Company’s two research partnerships.

Business Updates

Brand Portfolio

In December 2019, Cronos Group launched cannabis vaporizer devices for the Canadian adult-use market under the COVE™ and Spinach™ brands. In conjunction with this launch, the Company created new, tailored 510 thread vaporizer product lines for the COVE™ and Spinach™ brands, including cartridges that are tamper resistant, made from high-quality stainless-steel components and food grade silicone and have rechargeable draw batteries to prevent overheating. The formulations use premium cannabis extract and come in all-natural terpene-rich flavors. The vaporizer products are currently available at cannabis control authorities in Ontario, British Columbia, Manitoba, New Brunswick, and Nova Scotia, as well as from private-sector retailers in Saskatchewan.

In the fourth quarter, we successfully executed three holiday pop-up shops in Los Angeles and New York City to provide consumers with a curated retail experience of its Lord Jones™ products.

Cronos Group made the decision to pause distribution of PEACE+™ hemp-derived CBD tinctures through Altria Group. Inc.’s (“Altria”) sales and distribution network. Cronos Group remains focused on meeting the demands of adult consumers and will continue to evaluate other product formats and categories that we believe may be more suitable for the PEACE+TM brand in the evolving environment.

Global Sales and Distribution

In the fourth quarter, Cronos Group began selling cannabis flower and extract products to cannabis control authorities in Alberta, Manitoba, and Quebec. In addition to the new territories, the Company sells dried flower, pre-rolls, cannabis oils and cannabis extracts through its adult-use brands, COVE™ and Spinach™, to cannabis control authorities in Ontario, British Columbia, Nova Scotia and Prince Edward Island, as well as to private-sector retailers in Saskatchewan.

On October 25, 2019, Cronos Australia announced the closing of an A$20.0 million initial public offering. Cronos Group currently holds approximately 31 percent of the issued capital of Cronos Australia. With the initial public offering complete, Cronos Group is positioned to continue participating in Cronos Australia’s growth in the medicinal market in the Asia-Pacific region while generating value for the Company’s shareholders.

In the fourth quarter of 2019, Cronos Group completed its first test export of PEACE NATURALS™ branded cannabis oil products to Cronos Australia for distribution to the Australian medical market.

Global Supply Chain

In November 2019, Cronos Group began an operational redesign at the Peace Naturals Campus to better align the business with our strategic priorities. As part of this effort, specific facilities at the Peace Naturals Campus are in the process of being repurposed from cultivation to R&D, with a focus on developing new technologies for value-added product manufacturing, and production of derivative products. This redesign will also increase vault and warehousing capabilities at the facility.

In the fourth quarter of 2019, the Company recorded pre-tax charges of $7.2 million related to the repurposing efforts at the Peace Naturals Campus, with $1.9 million associated with an inventory write-down and $5.3 million of operating expenses, primarily related to impairment costs. The Company does not expect to incur any further significant costs related to the repurposing activities.

The Cronos Israel facility continues to move closer to operational readiness. Construction of Cronos Israel’s greenhouse and facility was completed in the third quarter of 2019. In December 2019, Cronos Israel successfully achieved GAP certification for propagation and cultivation, as well as GMP certification for the manufacturing and production facilities. Commencement of operations at the Cronos Israel facility will be subject to obtaining the remaining necessary cannabis production licenses under applicable law.

Intellectual Property Initiatives

Ginkgo Bioworks (“Ginkgo”) has filed certain patent applications pertaining to biosynthesis of cannabinoids to protect intellectual property developed as part of the research progressing under the partnership with Cronos Group. Under the partnership, Cronos Group is the exclusive licensee of the intellectual property covered by the patent applications for the target cannabinoids.

In July 2019, Cronos Group acquired a GMP compliant fermentation and manufacturing facility (“Cronos Fermentation”) in Winnipeg, Manitoba. The acquisition is expected to provide the fermentation and manufacturing capabilities needed in order to capitalize on the progress underway with Ginkgo by enabling Cronos Group to produce high-quality cannabinoids at scale using fermentation. In November 2019, a team of engineers, scientists, production and quality assurance personnel previously employed by Apotex Fermentation Inc., joined Cronos Group.

Cronos Group commenced work on developing scale-up and downstream processes at Cronos Fermentation, while in parallel Ginkgo develops microorganisms for producing cultured cannabinoids. As Cronos Group develops the processes and parameters, these learnings will be applied for the strains that will be utilized for commercial production of cultured cannabinoids. Commercial production at the facility is subject to completion of the equipment alignment for cannabinoid-based production, the receipt of the appropriate licenses from Health Canada and the achievement of the relevant milestones under the Ginkgo Strategic Partnership.

Update on COVID-19

Despite the significant challenges posed by the outbreak of COVID-19, as a designated essential business, Cronos Group’s global facilities currently remain operational. During this unprecedented time, the health, safety and well-being of our employees and our consumers remains Cronos Group’s top priority. The Company has business continuity plans in place to support its employee base while continuing to develop and produce reliable, high-quality products that meet the needs of consumers. As part of this, the Company implemented certain measures such as, among other measures, work-from-home policies for certain employees, enhanced hygiene and sanitation practices, modified schedules and social distancing protocols at the Peace Naturals Campus, Redwood, Cronos Fermentation, OGBC and Cronos Israel facilities. Cronos Group will continue to act in accordance with guidance from local, federal and international health and governmental authorities, and is prepared to make additional operational adjustments as necessary.

The spread and impact from COVID-19 on the global economy continues to rapidly evolve, and the ultimate impact of the COVID-19 outbreak is uncertain and subject to change. Despite Cronos Group’s business continuity efforts, the Company may see an impact on certain parts of its business and operations such as operational capacity or supply chain delays. The Company continues to closely monitor the rapidly evolving COVID-19 situation, and the impact it may have on the Company, its customers and its supply chain.

Rest of World Results

Cronos Group’s Rest of World reporting segment includes results of the Company’s operations for all markets outside of the United States of America. Cronos Group owns and operates license holders, Peace Naturals and OGBC, and currently sells dried flower, pre-rolls and cannabis extracts in the Canadian adult-use and medical markets. The Company established strategic joint ventures in Canada, Israel and Colombia. Cronos Group currently exports cannabis products to countries that permit the import of such products, such as Germany and Australia.

(in thousands of USD )

Three months December 31,

Change

Year ended December 31,

Change

2019

2018

$

%

2019

2018

$

%

Cannabis flower

$

2,877

$

3,228

$

(351

)

(11

)%

$

15,020

$

9,210

$

5,810

63

%

Cannabis extracts

1,678

1,028

650

63

%

5,338

2,732

2,606

95

%

Other

60

29

31

107

%

28

179

(151

)

(84

)%

Net revenue

4,615

4,285

330

8

%

20,386

12,121

8,265

68

%

Gross profit

(21,805

)

1,880

(23,685

)

(1,260

)%

(19,737

)

6,213

(25,950

)

(418

)%

Gross margin

(472

)%

44

%

—

(516)pp

(97

)%

51

%

—

(148)pp

Reported operating loss

$

(59,066

)

$

(8,871

)

$

(50,195

)

566

%

$

(106,928

)

$

(21,341

)

$

(85,587

)

401

%

Adjusted operating loss (i)

(51,798

)

(8,871

)

(42,927

)

484

%

(99,660

)

(21,341

)

(78,319

)

367

%

(i) See “Non-GAAP Measures” for more information, including a reconciliation of adjusted operating loss

Fourth Quarter 2019

Net revenue of $4.6 million in Q4 2019 increased by $0.3 million from Q4 2018, primarily driven by the introduction of vaporizer products and an increase in the volume of products sold, which were partially offset by a decrease in the price of products sold.

Gross profit (loss) of ($21.8) million in Q4 2019 decreased by $23.7 million from Q4 2018, primarily driven by the inventory write-down of $24.0 million.

The Company incurred an inventory write-down of $24.0 million, made up of a one-time charge of $1.9 million, related to the repurposing of certain facilities at the Peace Naturals Campus, and a $22.1 million write-down on cannabis plants, based on the estimated market value of the specific strains previously in production, and cannabis oil, primarily driven by downward pressure in market prices during the year. If we were to adjust for the effects of the inventory write-down, gross profit in Q4 2019, would have been $2.2 million, representing a gross margin of 48%. We anticipate inventory write-downs in the short-term due to pricing pressures in the marketplace and while the Company executes its operational repurposing of the Peace Naturals Campus.

Reported operating loss of ($59.1) million in Q4 2019 increased by $50.2 million from Q4 2018, primarily driven by the inventory write-down in Q4 2019, one-time charges related to the repurposing of certain facilities at the Peace Naturals Campus, an increase in general and administrative expenses in order to support the segment’s growth, an increase in sales and marketing in order to create, build and develop brands and an increase in R&D costs.

Adjusted operating loss of ($51.8) million in Q4 2019 increased by $42.9 million from Q4 2018, primarily driven by inventory write-downs in Q4 2019 and an increase in general and administrative expenses in order to support the segment’s growth, an increase in sales and marketing in order to create, build and develop brands and an increase in R&D costs.

Full-Year 2019

Net revenues of $20.4 million in Full-Year 2019 increased by $8.3 million from Full-Year 2018, primarily driven by higher volume of wholesale sales and an increase in the volume of products sold due to increased cannabis production and the growth of the adult-use market in Canada.

Gross profit (loss) of ($19.7) million in Full-Year 2019 decreased by $26.0 million from Full-Year 2018, primarily driven by the inventory write-down of $29.4 million.

The Company incurred an inventory write-down of $29.4 million, made up of a one-time charge of $1.9 million, related to the repurposing of certain facilities at the Peace Naturals Campus, and a $27.5 million write-down on cannabis plants, based on the estimated market value of the specific strains previously in production, and cannabis oil, primarily driven by downward pressure in market prices during the year. If we were to adjust for the effects of the inventory write-downs, gross profit in Full-Year 2019, would have been $9.7 million, representing a gross margin of 48%.

Reported operating loss of ($106.9) million in Full-Year 2019 increased $85.6 million from Full-Year 2018, primarily driven by inventory write-downs in Q4 2019, one-time charges related to the repurposing of certain facilities at the Peace Naturals Campus, an increase in general and administrative expenses in order to support the segment’s growth, an increase in sales and marketing in order to create, build and develop brands and an increase in R&D costs.

Adjusted operating loss of ($99.7) million in Full-Year 2019 increased by $78.3 million from Full-Year 2018, primarily driven by inventory write-downs in Q4 2019, an increase in general and administrative expenses in order to support the segment’s growth, an increase in sales and marketing in order to create, build and develop brands and an increase in R&D costs.

United States Results

As a result of Cronos Group’s acquisition of Redwood on September 5, 2019, a manufacturer and distributor of hemp-derived CBD infused products in the United States under the brand, Lord Jones™, the Company established the United States reporting segment.

(in thousands of USD)

Three months December 31

Change

Year ended December 31,

Change

2019

2018

$

%

2019

2018

$

%

Net revenue

$

2,693

—

N/A

N/A

$

3,364

—

N/A

N/A

Gross profit

1,430

—

N/A

N/A

1,873

—

N/A

N/A

Gross margin

53

%

—

N/A

N/A

56

%

—

N/A

N/A

Reported operating loss

$

(1,797

)

—

N/A

N/A

$

(2,777

)

—

N/A

N/A

Fourth Quarter 2019

Net revenues of $2.7 million in Q4 2019, driven by expanded distribution of Lord JonesTM branded products through online sales and an increased retail channel footprint.

Gross profit of $1.4 million in Q4 2019, driven by strong sales prices and brand equity. Gross margin for Q4 2019 was 53%.

Operating loss of ($1.8) million in Q4 2019, driven by increased investments in sales and marketing and general and administrative expenses as the business focuses on growth prospects and developing new brands and products.

Full-Year 2019

Net revenue of $3.4 million in Full-Year 2019, driven by the Redwood Acquisition on September 5, 2019.

Gross profit of $1.9 million in Full-Year 2019, driven by sales through e-commerce, retail and hospitality channels within Q4 2019. Gross margin in Full-Year 2019 was 56%.

Operating loss of $2.8 million in Full-Year 2019, driven by the increase in gross profit and the increased sales and marketing costs incurred in relation to the preparation for the launch of the PEACE+™ U.S hemp-derived CBD brand, as well as the introduction of several new U.S. hemp-derived CBD products under the Lord Jones™ brand.

Conference Call

The Company will host a conference call and live audio webcast on Monday, March 30, 2020 at 5:30 p.m. EDT to discuss 2019 fourth quarter and full-year results, the Company’s outlook and other matters. The call will last approximately one hour. An audio replay of the call will be archived on the Company’s website for replay. Instructions for the conference call are provided below:

Cronos Group is an innovative global cannabinoid company with international production and distribution across five continents. Cronos Group is committed to building disruptive intellectual property by advancing cannabis research, technology and product development. With a passion to responsibly elevate the consumer experience, Cronos Group is building an iconic brand portfolio. Cronos Group’s portfolio includes PEACE NATURALS ™, a global health and wellness platform, two adult-use brands, COVE™ and Spinach™, and two hemp-derived CBD brands, Lord Jones™ and PEACE+™. For more information about Cronos Group and its brands, please visit: www.thecronosgroup.com.

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